guidance note on audit of public charitable institutions und3

8/10/2019 Guidance Note on Audit of Public Charitable Institutions Und3

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GUIDANCENOTEONAUDITOFPUBLICCHARITABLE

INSTITUTIONSUNDERTHE

INCOME-TAXACT,1961

[Based on the law as amended by the Finance Act, 2007]

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA(Set up by an Act of Parliament)

NEW DELHI


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The Institute of Chartered Accountants of India New Delhi

All rights reserved. No part of this publication may be reproduced,stored in a retrieval system, or transmitted, in any form, or by anymeans, electronic, mechanical, photocopying, recording, or

otherwise, without prior permission in writing, from the publisher.

Website : www.icai.org

E-mail : [email protected]

First Edition : January, 2002

Second Edition : January, 2008

Price : Rs.150/-

ISBN No. : 978-81-8441-021-1

Published by : The Publication Department on behalf ofCA. R. Devarajan, Secretary of Fiscal Laws

Committee, The Institute of Chartered

Accountants of India, C-1, Sector-1, Noida

201 301.

Printed by : Sahitya Bhawan Publications, Hospital Road,

Agra 282 003.

April/2008/3000 Copies


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Foreword to the Second Edition

Since the publication of the first edition of the GuidanceNote on audit of public charitable institutions under the

Income-tax Act, 1961 significant amendments have beenmade. A number of judicial decisions have also beenrendered on the subject. Apart from this, some importantaudit related issues have arisen.

The Fiscal Laws Committee has thoroughly analysed allthese developments and has come out with the secondedition of the Guidance Note.

I compliment all the members of the Fiscal Laws Committeeand particularly Mr. G. Ramaswamy, Chairman for theirefforts in bringing out this edition.

Date: January 12, 2008

Place: New Delhi

CA. Sunil H. TalatiPresident


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Preface to the Second Edition

The first edition of the Guidance Note on audit of public

charitable institutions under the Income-tax Act, 1961 was

published in January, 2002. The Guidance Note givesguidance to members on audit of public charitable

institutions under the Income-tax Act, 1961. Its sister

publication Taxation of charitable trusts and institutions A

Study deals with the legal aspects of taxation of charitable

trusts and institutions.

Since the publication of the first edition, significant

amendments have been put on the statute book. The

amendment relating to taxation of anonymous donations is

very important. Several auditing and assurance standards

have been prescribed by the ICAI. It has become necessary

to give an idea about the Auditing and Assurance Standards

relevant for audit of public charitable institutions under the

Income-tax Act. Further, guidance has to be given in

respect of medical and educational services made available

to the specified category of persons and also the

accountants responsibility in respect of anonymous

donations. Apart from this, a number of judicial decisions

have been rendered which had to be appropriately

highlighted.

The Fiscal Laws Committee has thoroughly debated all

these issues and has come out with the second revised

edition.

I am thankful to CA. K.P. Garg for preparing the basic draft

of this revised edition. I thank all the members of the Fiscal

Laws Committee for ably seeing through the revised draft .

CA. Sunil H. Talati, President and CA. Ved Jain, Vice-

President, have been the guiding force in this endeavour.


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Finally, I appreciate the efforts of CA. R. Devarajan,

Secretary, Fiscal Laws Committee, CA. Mukta Kathuria, Sr.

Executive Officer for coordinating this project. Mr. Y.S.

Rawat, Sr. Steno-Typist rendered secretarial assistance.

I am sure that this revised edition will be useful to the

members.

Date: January 12, 2008

Place: New Delhi

CA. G.RAMASWAMY

CHAIRMAN

FISCAL LAWS COMMITTEE


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Foreword to the First Edition

The law of taxation of charitable trusts and institutions ishighly complex and has always been the subject matter of frequent

amendments due to the fact that the medium of charitableinstitutions is widely perceived as a handy tool for tax planning.Recently the law relating to taxation of educational institutions andhospitals has undergone drastic changes and the Government iskeen to bring all the charitable institutions claiming exemption of theirincome under the Income-tax Act into tighter scrutiny in the comingyears.

The Taxation Committee published earlier A Guide to Auditof Public Charitable Trusts under the Income-tax Act. The FiscalLaws Committee has thoroughly revised, expanded and upgradedthis guide into a full-fledged Guidance Note on Audit of PublicCharitable Institutions under the Income-tax Act. This guidance note

brings out all the essential aspects of audit of charitable institutionsunder the Income-tax Act and will be of very great use to themembers.

Apart from this, the Fiscal Laws Committee is also bringing astudy, Taxation of Charitable Trusts and Institutions which dealswith all the legal aspects of taxation of charitable trusts andinstitutions under the Income-tax Act.

The above publications, taken together, will be acomprehensive aid to the members for understanding the complexlaw of taxation and for adopting a uniform approach to the audit ofpublic charitable institutions under the Income-tax Act.

I compliment all the members of the Fiscal Laws Committeeand particularly Mr. Sunil Goyal, Chairman, Mr. T. N. Manoharan,Vice-Chairman and Mr. R. Bupathy for their efforts to see throughthis publication. I also wish to appreciate Mr. R. Devarajan,Secretary, Fiscal Laws Committee who has rendered competenttechnical assistance and also coordinated this project.

New Delhi N.D. Gupta11th January, 2002 President


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Preface to the First Edition

The concept of charity has been in vogue in India for quite some

time. Sections 11 to 13 of the Income-tax Act, 1961 contain the

provisions for taxation and regulation of charitable institutions.Section 12A(b) of the said Act requires that where the total income of

any charitable institution as computed under this Act, without giving

effect to the provisions of section 11 and 12, exceeds Rs.50,000/- in

any previous year, then the institution is required to get the accounts

audited by a Chartered Accountant and furnish the audit report along

with return of income. The law relating to charity has become very

complex since its evolution and many controversial/debatable issues

have arisen. Many changes have taken place in audit procedures

also. Earlier the Institute had published a book titled as A Guide to

Audit of Public Charitable Trusts under the Income-tax Act for thebenefit of the members. It was decided that looking to the

importance of the matter the same should be revised in two different

publications. In the matter of audit, this present publication being

Guidance Note on Audit of Public Charitable Institutions is being

published for the guidance of the members for conducting audit

under section 12A(b). This will be supplemented by another study

being published by the Institute on Taxation of Charitable Trusts and

Institutions.

I wish to extend my since thanks to Mr. M. Kandasami, FCA,

Chennai, who prepared the basic draft of this publication.

I also wish to place on record my sincere thanks to the Vice

Chairman and other members and invitees on the Fiscal Laws

Committee for their wholehearted support and cooperation for the

preparation of this guidance note.

I also sincerely thank the members of the Jaipur Study Group

which under the convenership of Mr. O.P. Agarwal and co-

convernership of Mr. Vijaykant Jain and Mr. Rajeev Sogani, were

instrumental in giving the final shape to this guidance note.


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I am also thankful to Mr. N.D. Gupta, President and Mr. A. K.

Chandak, Vice-President of the Institute, for their encouragement

and guidance in the publication of this guidance note.

I also want to place on record my since appreciation for Mr. R.

Devarajan, Secretary to the committee for technical assistance and

cooperation and Mr. Y.S. Rawat for the secretarial assistance

rendered by them.

I am sure that this guidance note will be of great help to the

members in discharging their onerous responsibility under section

12A(b) of the Income-tax Act.

Sunil Goyal

Place: Jaipur Chairman

January 11, 2002 Fiscal Laws Committee


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CONTENTS

Para Particulars Page

1 Introduction 1

2. Objective of this Guidance Note 2

3. Terms, abbreviations used in this Guidance Note 2

4. Responsibility of the institution 3

5. Accountants responsibility 4

6. Audit when required 5

7. Relevant statutory provisions and rules 8

8. Charitable purpose 10

9. Scope of audit under section 12A(1)(b) 12

10. Accounting Standards 16

11. Compliance with Auditing and Assurance Standards 17

12. Method of accounting 31

13. Form No.10B 32

14. Prescribed particulars in the Annexure 34

15. Audit report under section 12A(1)(b) 37

16. Examination of balance sheet and the profit andloss account

38

17. Information and explanations 39

18. Opinion about the true and fair view 41

19. Particulars 42

20. Annexure to the audit report 42

21. I. Amount of income applied during the previous year 43

22. Income applied 43


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23. Income deemed to have been applied 48

24. Income set apart for application 50

25. Exemption under section 11(1)(c) 51

26. Income accumulated in excess of the specified limit 52

27. Investment or deposit in the prescribed manner 55

28. Deemed income under section 11(1B) 57

29. Application for non-charitable purposes 58

30. II - Application or use of income or property for thebenefit of persons referred to in section 13(3)

61

31. Lending of income or property 61

32. Use of land, building or other property 62

33. Payment of salary, allowance etc. 62

34. Services made available 63

35. Purchase of shares, security or other property 63

36. Sale of share, security or other property 63

37. Diversion of any income or property 64

38. Application of income or property in any other manner 64

39. Medical or educat ional services 64

40. III. Investments held at any time during theprevious year(s) in concerns in which personsreferred to in section 13(3) have a substantialinterest

65

41. Furnishing of audit report 66

42. Debatable issues 67

ANNEXURES

I. Provisions of Income-tax Act, 1961 68

II. Relevant Rules and Form under the Income-tax Rules,1961

91


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III. Section II : Auditing and Assurance Standards 95

IV. Judicial decisions explaining the scope of the termscharitable purpose and related issues

97

V. Relevant Circulars 108

VI. Debatable issues 116

VII. List of allied legislations 125


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CLARIFICATION REGARDING AUTHORITY ATTACHEDTO THE DOCUMENTS ISSUED BY THE INSTITUTE

"Guidance Notes' are primarily designed toprovide guidance to members on matters whichmay arise in the course of their professional workand on which they may desire assistance inresolving issues which may pose difficulty.Guidance Notes are recommendatory in nature.

A member should ordinarily follow

recommendations in a guidance note relating toan auditing matter except where he is satisfiedthat in the circumstances of the case, it may notbe necessary to do so. Similarly, whiledischarging his attest function, a member shouldexamine whether the recommendations in aguidance note relating to an accounting matterhave been followed or not. If the same have notbeen followed, the member should considerwhether keeping in view the circumstances of thecase, a disclosure in his report is necessary".

(Volume I of the Compendium of GuidanceNotes (4thEdition, 1993), page (x), Para 5)


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Guidance Note on audit of public charitable

institutions under the Income-tax Act, 1961

1. Introduction

1.1 Under section 11 of the Income-tax Act, 1961 certain

incomes derived from property held under trust for charitable

or religious purposes specified thereunder shall not be

included in the total income of the previous year subject to

the conditions prescribed by the Act

1.2 The person entitled to get exemption under section 11 of the

Income-tax Act, 1961 may be a trust, society, company

registered under section 25 of the Companies Act or any

other legal obligation. For the purpose of brevity, in this

guidance note such entities are referred to by the term

institution, without going into the fine distinctions that may

exist between a trust and an institution.

1.3 In order to get the exemption under section 11 of the Income-

tax Act, 1961 such institutions should fulfill two conditions

namely (i) the institution must be registered by the

Commissioner on an application being made for registration

by the institution in receipt of the income in accordance with

the provisions of section 12A(1)(a) and (ii) in terms of section

12A(1)(b) where the total income of the person as computed

under this Act without giving effect to the provisions of

section 11 and section 12 exceeds the maximum amount

which is not chargeable to income-tax in any previous year,

the accounts of the institution for that year should be audited

by an accountant and the person in receipt of the income

should furnish along with the return of income for the relevant

assessment year the report of such audit in the prescribed

form duly signed and verified by such accountant and setting

forth such particulars as may be prescribed.

1.4 The scope of this guidance note is restricted to the audit of

the institutions prescribed under section 12A(1)(b). Such

audit has been prescribed essentially to ensure compliance


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with the provisions of sections 11 to 13. The nature of audit

required under section 12A(1)(b) is similar to that of audit of

general purpose financial statements. Hence, the accountant

has to adopt the same procedures of audit as prescribed

under Auditing and Assurance standards - AASs while

certifying true and fair view shown by financial statements.

2. Objective of this Guidance Note

2.1 The object of this guidance note is to provide guidance to the

accountants for discharging their responsibilities under

section 12A(1)(b). It intends to;

(i) assist in understanding the respective responsibilities

of the institution and the accountant.

(ii) guide the accountant as to the nature and scope of

information to be obtained by him from the institutionto enable him to conduct the audit.

(iii) provide guidance on the verification

procedures to be adopted by the accountant

for giving the audit report and the necessary

information in the annexure thereto.

(iv) to give an idea about the various debatable

issues relating to the law of taxation of public

charitable institutions and

(v) explain the circumstances where a disclosureor qualification or disclaimer may be required

from the accountant while giving his audit

report.

3. Terms, Abbreviations used in this Guidance Note

In this Guidance Note the following terms and abbreviations

often occur in the text. A brief explanation of such terms

and abbreviations is given below. Further, reference to a

section without reference to the relevant Act means that the

section has reference to the Income-tax Act, 1961.


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(a) Act

The Income-tax Act, 1961.

(b) Accountant

Accountant means a chartered accountant within the

meaning of the Chartered Accountants Act, 1949, asreferred to in section 288.

(c) AS

Accounting Standards issued, prescribed and made

mandatory by the Institute of Chartered Accountants of

India.

(d) AS(IT)

Accounting Standards notified by the Central Government

under section 145(2).

(e) Board

The Central Board of Direct Taxes constituted under the

Central Boards of Revenue Act, 1963.

(f) Circular

A circular or instruction issued by the Board under section

119(1) of the Income-tax Act, 1961.

(g) ICAI

The Institute of Chartered Accountants of India.

(h) Rules

The Income-tax Rules, 1962.

4. Responsibility of the institution

Ensuring compliance of the provisions of sections 11 to

13 is primarily the responsibility of the institution. For

the purpose of audit under section 12A(b), the

institution should prepare all the necessary information

and particulars required under the relevant provisions to

enable the accountant to verify and report in


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accordance with the requirements of the Act. Further,

such information and particulars should be duly

authenticated by the competent authority governing the

affairs of the institution. It would be advisable for the

institution to take into consideration the following

principles while preparing the necessary informationand particulars;

(a) it can rely upon the judicial pronouncements

while taking any particular view about inclusion

or exclusion of any items in the annexure to be

furnished along with the report in Form No.10B.

(b) if there is a conflict of judicial opinion on any

particular issue it should refer to the view which

has been followed while giving the relevant

particulars.

The institution should also make available to the

accountant all the books of account, records and other

documents as may be deemed necessary by the

accountant for carrying out the audit.

5. Accountants responsibility

5.1 The audit report under section 12A(1)(b) is required to be

given in Form No.10B prescribed under rule 17B, which

requires the accountant to give his opinion whether to the

best of his information and according to the information given

to him the accounts give a true and fair view. Further, he hasto annex the prescribed particulars.

5.2 The principal aim of this audit is to enable the Assessing

Officer to satisfy himself about the genuineness of the claim

for exemption under section 11 and also whether the

institution has complied with all the requirements prescribed

by the statute. As such the accountant should take care to

see that there is compliance with the provisions of the Act to

enable the Assessing Officer to satisfy himself about the

genuineness of the claim for exemption under section 11

made by the institution. The accountant should also satisfy


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himself regarding compliance with the provisions of the Act

by the institution in respect of maintenance of proper books

of accounts, information and returns from branches and other

relevant records. The accountant has to examine the balance

sheet and the profit and loss and give an opinion whether

they exhibit a true and fair view.

5.3 The accountant should note that the AASs issued by the

ICAI would be applicable to the audit under section

12A(1)(b). A brief discussion in this regard can be found in

paragraph 11. A list ofAASsissued by the ICAI is given in

Annexure III.

5.4 As in the case of other professional assignments, the

accountant should comply with the Code of Ethics issued by

the ICAI in conducting the audit under section 12A(1)(b). The

accountant is advised to conduct the audit under section

12A(1)(b) in accordance with this guidance note.

6. Audit when required

6.1 Clause (b) of sub-section (1) of section 12A of the Act

requires audit if the total income of the institution for the

relevant year exceeds the maximum amount which is not

chargeable to income tax. This means if the total income of

the institution in any previous year before giving effect to the

provisions of the Act is less than the maximum amount which

is not chargeable to income tax, then audit under the Act is

not required. It is significant to note that contributions made

with a specific direction that they shall form part of the corpus

of the institution is included in the definition of income under

section 2(24). However, by virtue of section 11(1)(d) they

shall not be included in the total income of the previous year.

The implications of the above provisions are that for

determining the ceiling limit of the maximum amount which is

not chargeable to income tax for the purpose of exigibility to

audit under section 12A(1)(b), contributions towards the

corpus of the institution are to be included. However,

incomes exempt under section 10, e.g. dividends, are not to


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GUIDANCE NOTE

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be included for ascertaining whether the income exceeds the

maximum amount which is not chargeable to income tax.

6.2 It is sometimes likely that on a computation made by the

institution, the total income does not appear to exceed the

limit of the maximum amount which is not chargeable to

income tax. However, subsequently it may so transpire that

the total income exceeds the maximum amount which is not

chargeable to income tax on account of circumstances which

were not known originally [e.g. accidental misapplication of

the earmarked investments under section 11(2)(b)]. The

section does not provide for such contingencies; but it would

appear that in such cases the report on audit could be

submitted with a revised return.

6.3 Some of the State legislations relating to trusts and charitable

institutions may provide for compulsory audit even where the

income is below the maximum amount which is notchargeable to income tax. Such ceiling limits have to be

construed purely in terms of the statutory provisions of the

relevant State Acts.

6.4 The donations received by an institution whose income are

exempt under sections 11 and 12 or clause (23) or clause

(23AA) or clause (23C) of section 10 of the Act are eligible for

deduction under section 80G(2)(a) (iv) of the Act provided the

institution is approved by the Director General (exemptions)/

Commissioner of Income-tax under section 80G(5)(vi).

Certain conditions are to be fulfilled in order to claim thedonations made to such an institution eligible for deduction

under section 80G. Further, there is a prescribed procedure

for getting the approval from the Director General

(Exemptions) Commissioner of Income-tax.

6.5 For the purposes of audit prescribed under section 12A(1)(b),

the accountant has to give his report in Form No.10B.

Further, he has to annex certain particulars mentioned in the

Annexure to the above Form No.10B.


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6.6 This guidance note primarily deals with the duties of the

accountant in the context of the requirements of sections 11

to 13. The primary responsibility of the accountant who is

required to do the audit in terms of section 12A is with

reference to the provisions of the Act which is a self

contained code by itself. Strictly speaking, unless there is aspecific requirement in the Act itself or under any rule/form

prescribed thereunder requiring the auditor to verify certain

matters in relation to other laws, there is no duty cast upon

the accountant to verify or certify about the compliance with

the provisions of any other law. However, if the non-

compliance with the provisions of any other law would lead to

the contravention of the provisions of the Act in so far as it

relates to audit under section 12A and affects the truth and

fairness thereof, then alone it is the duty of the accountant to

verify the compliance with the provisions of other law(s).

Therefore, the accountant may verify whether the institutionhas complied with the requirements of laws like Foreign

Contributions Regulation Act, 1976, Societies Registration

Act, 1860 etc. having regard to the truth and fairness of the

financial statements. Some useful particulars regarding

these allied legislations are given in Annexure VII. Further,

the requirements of AAS-21 as mentioned in paragraph

11.21 have to be duly complied with.

6.7 Apart from the requirements as to audit of institutions as

contained in section 12A(1)(b), there are other relevant

requirements like registration of such institutions. Section12A(1)(a) deals with the conditions regarding registration of

an institution under the Act. On being registered, the

institution will get the benefit of exemption of its income under

the provisions of section 11 provided it complies with the

prescribed statutory requirements. The application for

registration has to be made in Form No.10A in duplicate,

which is prescribed under Rule 17A of the Rules. A detailed

treatment of the law applicable in respect of exemption of

income of such institutions can be found in the publication of


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ICAI Taxation of educational and charitable institutions

under the Income-tax Act, 1961.

7. Relevant statutory provisions and rules

7.1 Section 2(15) defines charitable purpose. Section 2(24)(ii)

provided earlier that contributions made with a specificdirection that they shall form part of the corpus of the

institution was not to be included in income. This provision

was amended with effect from 1.4.1989, so as to include in

the definition of income all voluntary contributions.Sections

11, 12, 12A, 12AA, and 13 come within the scope of Chapter

III of the Act contain the provisions relating to exemption of

income from property held for charitable or religious

purposes. Section 11 specifies the types of income exempt

in the hands of public charitable institutions, section 12 deals

with income of trusts or institutions from contributions, section

12A contains the condition as to registration of trust etc.,section 12AA prescribes the procedure for registration and

section 13 enumerates the circumstances to which the

exemption provisions of section 11 would not apply.

7.2 Any income referred to in sub-section (2) of section 11 which

is credited or paid to any trust or institution registered under

section 12AA or to any fund or institution or trust or any

university or other educational institution or any hospital or

other medical institution referred to in sub-clause (iv) or sub-

clause (v) or sub-clause (vi) or sub-clause (via) of clause

(23C) of section 10 shall be deemed to be the income of suchperson of the previous year in which it is so credited or paid

or of the previous year immediately following the expiry of the

period aforesaid.

7.3 Sub-section (2) of section 12 provides that the value of any

services, being medical or educations services, made

available by any charitable or religious trust running a

hospital or medical institution or any educational institution, to

any person referred to in clause (a) or clause (b) or clause (c)

or clause (cc) or clause (d) of sub-section (3) of section 13,

shall be deemed to be income of such trust or institution


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GUIDANCE NOTE

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derived from property held under trust wholly for charitable or

religious purposes during the previous year in which such

services are so provided and shall be chargeable to income

tax not withstanding the provisions of sub-section (1) of

section 11.

7.4 Anonymous donations: From 1-4-2007, relevant to

assessment year 2007-08 a new section 115BBC has been

inserted to provide that contributions received by way of

anonymous donations by any trust or institution referred to in

section 11 will be included in the total income and taxed at

the rate of 30 per cent. However exception has been

provided for anonymous donation received by -

(a) any trust or institution created or established wholly

for religious purpose:

(b) any trust or institution created or established wholly

for religious and charitable purposes other than any

anonymous donation made with a specific direction

that such donation is for any university or other

education institution or any hospital or other medical

institution run by such trust or institution.

Anonymous donation has been defined to mean any

voluntary contribution referred to in sub-clause (iia) of clause

(24) of section 2, where a person receiving such contribution

does not maintain a record of the identity indicating the name

and address of the person making such contribution and

such other particulars as may be prescribed.

7.5 Sub-section (7) of section 13 provides that nothing contained

in section 11 or section 12 shall operate so as to exclude

from the total income of the previous year of the person in

receipt thereof, any anonymous donations referred to in

section 115BBC on which tax is payable in accordance with

the provisions of that section.

7.6 Rules 17, 17A, 17B and 17C are the relevant rules and Form

No.10, and Form No.10B are the relevant forms.


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7.7 The text of the relevant statutory provisions is given in

Annexure I. The text of the relevant rules and Form No.10

are given in Annexure II. Text of Form No.10B is given in

paragraph 13.

8. Charitable purpose

8.1 The Income-tax Act does not define charity. However,sub-

section (15) of section 2 defines charitable purpose.

Accordingly, charitable purpose includes relief of the poor,

education, medical relief, and the advancement of any other

object of general public utility.

8.2 The definition of charitable purpose includes any other

object of general public utility. The question arises as to

what is an object of general public utility. This expression

has not been defined anywhere in the Act.

8.3 Judicial authorities have laid down that it is the intrinsic objectof the trust and the scope of its benefit to the public which

should be the guiding consideration in coming to a conclusion

whether an institution is established for a charitable purpose.

It has also been held that objects which exclude private

gains, which are unselfish and are devoted to public benefit

or are philanthropic, that is to say, dictated by a desire to do

good to the public are charitable purposes.

8.4 Charitable purposes and objects of general public utility

embrace a wide range. It is not necessary that such objects

should directly benefit the entire community, but it is quitesufficient if a substantial portion of the community benefits

therefrom.

8.5 The Honble Supreme Court in the case of CIT v. Andhra

Chamber of Commerce [1965] 55 ITR 722 (SC)held that the

advancement or promotion of trade, commerce and industry

leading to economic prosperity enured for the benefit of the

entire community. That prosperity would be shared also by

those who were engaged in a trade, commerce and industry.

In such condition also the property was held to be used for

general public utility. So, when the principal object of a


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chamber of commerce was to promote and protect trade,

commerce and industry in India or any part thereof, the

Supreme Court held that the said object was of general

public utility. Similar views were reiterated by Honble

Supreme Court in the case of Surat Art Silk Cloth

Manufacturers Association (1980) 121 ITR 1 (SC).

8.6 In the above noted case the Honble Supreme Court laid

down the following general principles to determine when a

purpose would become charitable.

Charitable purpose includes not only relief of the poor,

education and medical relief alone, but advancement of other

objects of general public utility as well. Section 2(15) is

intended to serve as a special definition of the expression

charitable purpose for the Act. It is again inclusive and not

exhaustive. Even if the object or purpose may not be

regarded as charitable in its popular signification as notintended to give relief to the poor or for the advancement of

education or medical relief, it should still be included in the

expression charitable purpose, if it advances an object of

general public utility. The expression objects of general

public utility, however, is not restricted to objects beneficial

to the whole of mankind. An object beneficial to a section of

the public could also be treated as an object of general public

utility. To serve a charitable purpose, it is not necessary that

the object should be to benefit the whole of mankind or even

all persons living in a particular country or province. It is

sufficient if the intention is to benefit a section of the public as

distinguished from specified individuals. The section of the

community sought to be benefitted must be undoubtedly

defined and identifiable by some common quality of a public

or impersonal nature. Where there is no common quality of a

public or impersonal nature; where there is no common

quality uniting potential beneficiaries into a class, it may not

be regarded as charitable.

8.7 The Bombay High Court held in Bar Council of Maharashtra

v. CIT [1980] 126 ITR 27 (Bom.) that the word general in


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section 2(15) means pertaining to a whole class, the word

public means the body of people at large and the word

utility means usefulness. Thus the advancement of any

object beneficial to the public or section of the public as

distinguished from an individual or group of individuals would

be a charitable purpose. The State Bar Council was held tobe a body constituted for general public utility and its income

would be entitled to exemption under section 11. The

Supreme Court affirmed the decision of the High Court when

the case came up in appeal in CIT v. Bar Council of

Maharashtra [1981] 130 ITR 28 (SC).

8.8 Further, the judicial decisions on the scope of the term

charitable purpose and other related matters are given in

Annexure IV.

9. Scope of audit under section 12A(1)(B)

9.1 Under the provisions of sub-clause (b) of sub-section (1) of

section 12A, where the total income of the trust or institution

as computed under the Act without giving effect to the

provisions of sections 11 and 12 exceeds the maximum

amount which is not chargeable to income-tax in any

previous year, the accounts of the trust or institution for that

year should be audited by an accountant as defined in the

Explanation below sub-section (2) of section 288 and the

person in receipt of the income should furnish along with the

return of income for the relevant assessment year the report

of such audit in the prescribed form duly signed and verifiedby such accountant and setting fourth such particulars as

may be prescribed. The report is to be given by an

accountant in Form No. 10B as prescribed under rule 17A.

The accountant is required to state whether he has examined

the balance sheet of the institution as at the relevant date

and the profit and loss account for the year ended on that

date which are in agreement with the books of account

maintained by the said institution. He has to further state

whether he has obtained all the information and explanations

which to the best of his knowledge and belief were necessary


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for the purposes of the audit. He has to give his opinion

whether proper books of account have been kept by the head

office and the branches of the institution visited by the

accountant so far as appears from his examination of the

books. He has also to give his opinion whether proper

returns adequate for the purposes of audit have beenreceived from branches not visited by him. If he has any

comments to offer about the information and explanations,

proper books of account or returns from branches, he has to

state such comments in the body of the audit report. He has

to give his opinion whether to the best of his information and

according to the information given to him the said accounts

give a true and fair view shown in financial statements.

Lastly, he has to state that the prescribed particulars are

annexed thereto. In this connection the requirements of AAS

28 The Auditors Report on Financial Statementsshould

be kept in mind. The purpose of this AAS is to establishstandards on the form and content of the auditors report

issued as a result of an audit performed by an auditor of the

financial statements of an entity. The standard prescribes

many requirements like that the auditor should review and

assess the conclusions drawn from the audit evidence as the

basis for the expression of an opinion on the financial

statements, the auditors report should contain a clear written

expression of an opinion on the financial statements taken as

a whole etc.

9.2 In giving his report the accountant will have to use hisprofessional skill and expertise and apply such audit tests

as the circumstances of the case may require, considering

the contents of the audit report. He will have to conduct

the audit by applying the generally accepted auditing

procedures, which are applicable for any other audit. He

can apply the test checks depending on the evaluation of

internal control procedures followed by the assessee. The

accountant will also have to keep in mind the concept of

materiality depending upon the circumstances of each

case.


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9.3 The audit report given under this section is to assist the

income-tax department to verify whether the assessee has

complied with the provisions of sections 11 to 13 of the Act.

In order that the accountant may be in a position to explain

any question which may arise later on, it is necessary that

he should keep detailed notes about the evidence on whichhe has relied upon while conducting the audit and also

maintain all his working papers. Such working papers

should include his notes on the following, amongst other

matters:

(a) work done while conducting the audit and by whom;

(b) explanation and information given to him during the

course of the audit and by whom;

(c) decision on the various points taken;

(d) the judicial pronouncements relied upon by him

while drafting the audit report; and

(e) certificates issued by the client / management

letters.

The audit under section 12A(1)(b) of the Act falls under the

Attestation Engagement and thus is covered by the

Statement of Peer Review. Accordingly, all requirements

laid down in the Statement including documentation are

applicable.

9.4 It is important that the audit working papers prepared and /

or obtained by the accountant provide evidence that:

(i) the opinion expressed by the accountant in respect

of the particulars furnished in the Annexure is based

on the examination made by him;

(ii) in arriving at his opinion, the accountant has given

due cognizance to the information and explanations

given by the assessee and that his opinion is not

arbitrary;


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(iii) the information and explanations obtained were full

and complete that is, the accountant has called for

all the information and explanations which were

necessary to be considered before arriving at his

opinion; and

(iv) the accountant did not merely rely upon the

information or explanations given by the assessee

but that he subjected such information and

explanations to reasonable tests to verify their

accuracy and completeness.

9.5 The form of audit report requires the accountant to examine

the balance sheet and the profit and loss account of the

institution. Perhaps, the nomenclature "profit and loss

account" may be less appropriate in relation to an institution

where, on account of lack of profit motive the income

statement is more commonly designated as income andexpenditure account. However, the auditors report in form

10B specifies profit and loss account and as such it would

only be appropriate in all cases to designate the same as

profit and loss account. Apart from this, since section 11(4A)

permits a trust or a charitable institution to carry on business,

profit and loss account and balance sheet have to be

prepared in respect of such business.

9.6 The accountant has to examine the balance sheet and the

profit and loss account of the institution in the light of

information and explanations and various branch returns andgive an opinion whether they exhibit a true and fair view. In

this respect the audit under section 12A(1)(b) can be equated

to an audit of general purpose financial statements.

9.7 If the institution is constituted in the form of a company

registered under section 25 of the Companies Act, 1956, it is

possible that prior to the audit under section 12A(1)(b),

statutory audit under the Companies Act may have been

completed. The accountant may rely on the above statutory

audit report to such extent and in such manner as provided in

AAS 10 Using the work of another auditor.


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9.8 It may be noted that mere filing of the audit report under

section 12A(1)(b) may not fulfill the requirement of filing tax

audit report in appropriate cases. For example, where an

institution is carrying on a business whose objects are

incidental to the attainment of the objectives of the institution

and separate books are maintained in respect of such

business, audit under section 44AB of the Act may become

necessary if the sales, turnover or gross receipts from such

business exceed Rs.40 lakhs. In that case the institution has

to get its accounts audited under section 44AB and furnish

the audit report along with return of income before the

specified date.

10. Accounting standards

10.1 Accounting Standards apply in respect of commercial,

industrial or business activity of any enterprise, irrespective

of whether it is profit oriented or is established for further

charitable or religious purposes. In the case of an

institution, AS will not apply if all activities of such

institutions are not of commercial, industrial or business

nature (e.g. an activity of collecting donations and giving

them to flood affected people). In other words, exclusion of

an institution from the applicability of the AS would be

permissible only if no part of the activity of such institution is

commercial, industrial or business in nature. Even if a very

small portion of the activities of an institution is considered

to be commercial, industrial or business in nature, then it

cannot claim exemption from the application of AS. The AS

would apply to all its activities including those which are not

commercial, industrial or business in nature. This

fundamental principle of applicability of AS is equally valid

in respect of institutions also. Further, the Government has

notified AS (IT) under sub-section (2) of section 145. AS

(IT) are applicable to all the assessees maintaining their

accounts on mercantile basis, if they carry on a business.


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11. Compliance with Auditing and Assurance Standards

As the audit report under section 12A(1)(b) is an expression

of opinion about the truth and fairness of general purpose

financial statement, the accountant is advised to follow all

Auditing and Assurance Standards. The following is a brief

summary of the AASs issued by the ICAI.

11.1 AAS 1 : Basic Principles Governing an Audit

This Auditing and Assurance Standard was the first standard

on auditing issued by the Institute. As the name suggests, it

seeks to lay down and briefly explain the basic principles

which govern the auditors professional responsibilities and

which should be complied with whenever an audit is carried

out. These principles are, namely, integrity, objectivity and

independence, confidentiality, skills and competence, work

performed by others, documentation, planning, audit

evidence, accounting system and internal control, and, finally,

audit conclusions and reporting.

11.2 AAS 2 : Objective and Scope of the Audit of Financial

Statements

This Standard describes the overall objective and scope of

the audit of general purpose financial statements of an

enterprise by an independent auditor. The Standards deals

with the following important aspects of an audit:

Objective of an Audit: expression of opinion, the concept of

true and fair view.

Responsibility for Financial Statements: responsibility of the

management vis a visauditor.

Scope of Audit: factors determining scope, reliability and

sufficiency of audit evidence, disclosure aspects,

undiscovered material misstatements, etc.

11.3 AAS 3 : Documentation

This Standard was issued with the purpose of amplifying the

basic principle that the auditor should document matters


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which are important in providing evidence that the audit was

carried out in accordance with the generally accepted

auditing standards in India. The Standard explains as to what

constitute working papers, need for working papers. The

Standard also touches upon the following areas:

Form and Content: factors affecting form and content,

quantum of working papers, permanent audit file,

current audit file.

Ownership and Custody of Working Papers

11.4 AAS 4 (Revised) : The Auditors Responsibility to Consider

Fraud and Error in an Audit of Financial Statements

As the name indicates, the purpose of this AAS is to establish

standards on the auditors responsibility to consider fraud and

error in an audit of financial statements. The following gives

an overview of the contents of the AAS:

Fraud and error and their characteristics

Responsibility of those charged with governance

Responsibility of management

Responsibility of the auditor

Indication of possible misstatement

Evaluation and disposition of misstatements.

Effect on auditors report

Documentation

Management representations

Communication

Auditor unable to complete engagement

The appendices to the AAS contain examples of risk factors

relating to misstatements resulting from fraud/error, examples

of modifications in auditors procedures, and indicators of

possible fraud or error.


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11.5 AAS 5 : Audit Evidence

The purpose of this AAS is to establish standards on the

basic principle that the auditor should obtain sufficient

appropriate audit evidence through compliance and

substantive procedures to enable him to draw reasonable

conclusions there from on which to base his opinion on the

financial information. The AAS also explains the concept of

sufficient appropriate audit evidence, factors affecting it as

also the various types of assertions, internal vis--vis external

evidence. The Standard also deals with the methods of

obtaining evidence, namely, inspection, observation, inquiry

and confirmation, computation and analytical review.

11.6 AAS 6 : Risk Assessments and Internal Control

The purpose of this AAS is to establish Standards on the

procedures to be followed to obtain an understanding of theaccounting and internal control systems and on audit risk and

its components: inherent risk, control risk and detection risk.

The standard also extensively deals with aspects such as

meaning of audit risk and its three components, meaning and

inherent limitations of accounting and internal control

systems, control environment, control risk and its

assessment, tests of control, assessment of inherent risk and

its relationship with control risk, assessment of detection risk,

audit risk in small business and communication of

weaknesses.

11.7 AAS 7 : Relying Upon the Work of an Internal Auditor

The AAS establishes standards on the procedures that

should be adopted by the external auditor to assess the work

of an internal auditor for placing reliance upon that work. The

Standard touches upon topics like scope and objective of

internal audit function, relationship between internal and

external auditor, aspects to be considered in evaluating the

internal audit function, coordination between internal and

external auditor, evaluating specific internal audit work.


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11.8 AAS 8 : Audit Planning

The basic objective of the AAS is to establish standards on

the principle that the auditor should plan his work to enable

him to conduct an effective audit in an efficient manner and

that the plan should be based on the knowledge of the

clients business. The AAS covers topics such as advantages

of audit planning, sources of obtaining knowledge of the

clients business, topics on which discussion with client might

be useful, factors to consider in development of an overall

plan, developing an audit programme etc.

11.9 AAS 9 : Using the Work of an Expert

This AAS discusses the auditors responsibility in relation to,

and the procedures the auditor should consider in, using the

work of an expert as audit evidence. The AAS explains the

concept of an expert, situations in which the need for usingthe work of an expert might arise, factors to consider when

deciding whether to use the work of an expert or not,

evaluating the skills and competence and objectivity of an

expert, procedures for evaluating the work of an expert,

references to an expert auditors report, etc.

11.10 AAS 10 : Using the Work of Another Auditor (Revised)

This AAS discusses the procedures to be applied in

situations where an independent auditor (principal auditor)

reporting on the financial statements of the entity uses thework of another auditor (other auditor) with respect to the

financial statements of one or more components included in

the financial statements of the entity. The AAS explains the

concept of component. It also deals in detail with the

procedures to be adopted by the principal auditor when using

the work of the other auditor, need for evaluating the

professional competence of the other auditor,

documentation, coordination between principal and other

auditor, reporting considerations for the principal auditor, and

division of responsibility.


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11.11 AAS 11 : Representations by Management

The AAS was issued to establish standards on the use of

management representations as audit evidence, the

procedures to be applied in evaluating and documenting

management representations, and the action to be taken if

management refuses to provide appropriate representations.

The Standard touches upon topics including situations in

which the auditor should obtain management

representations, management representation vis a vis other

audit evidence, documentation of such representations, types

of management representations, basic elements of

management representation letters, etc. The Standard also

contains example of a management representation letter on

the different elements of the financial statements

11.12 AAS 12 : Responsibility of Joint Auditors

The practice of appointing more than one auditor to conduct

the audit of large entities has been in vogue for a long time.

Such auditors, known as joint auditors, conduct the audit

jointly and report on the financial statements of the entity.

This AAS deals with the professional responsibilities which

the auditors undertake in accepting such appointments as

joint auditors. The important aspect of joint audit

assignments as covered by this AAS include possible bases

of division of work among joint auditors, coordination among

joint auditors, joint and several liability of joint auditors,

responsibility for obtaining and evaluating information andexplanation from management, responsibility for scrutiny of

branch accounts and returns, need for review of work

performed by one joint auditor by other joint auditor(s),

reporting responsibilities etc.

11.13 AAS 13 : Audit Materiality

Information is material if its misstatement (i.e., omission or

erroneous statement) could influence the economic decisions

of users taken on the basis of the financial information.

Materiality provides a cut off point rather than being a primary


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evaluation of sample results, analysis of errors in the sample,

projection of errors, reassessing sampling risk.

11.16 AAS 16 : Going Concern

As members are aware, going concern is one of the

fundamental assumptions underlying the preparation of thefinancial statements. The objective of this AAS is to establish

standards on the auditors responsibilities in the audit of

financial statements regarding the appropriateness of the

going concern assumption as the basis for the preparation of

the financial statements. The AAS deals with the relevant

areas in this regard such as indications financial, operating

and other - of appropriateness or otherwise of the going

concern assumption, audit evidence, illustrative audit

conclusions and reporting in case going concern assumption

considered appropriate/ going concern question not resolved/

going concern assumption considered inappropriate.

11.17 AAS 17 : Quality Control for Audit Work

The purpose of this Standard is to establish standards on

quality control policies and procedures of an audit firm

regarding audit work generally; and procedures regarding the

work delegated to assistants on an individual audit. The AAS

deals with the such aspects of the quality control for audit

work, namely, objectives of the quality control policies to be

adopted by audit firm, direction to be provided to the

assistants to whom work has been delegated, supervision of

the work being performed by the assistants, review of the

work being performed by assistants and factors to be

considered therein.

11.18 AAS 18 : Audit of Accounting Estimates

Accounting Estimates means an approximation of the amount

of an item in the absence of a precise means of

measurement. This AAS, as the name suggests, establishes

standards on the audit of accounting estimates. The AAS,

accordingly, deals with such aspects, including, nature of

accounting estimates, audit procedures, reviewing and


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testing the process used by management, evaluation of data

and consideration of assumptions, testing of calculations,

comparison of previous estimates with actual results, use of

independent estimates, review of subsequent events,

evaluation of results of audit procedures.

11.19 AAS 19 : Subsequent Events

Subsequent events refer to significant events occurring

between the balance sheet date and the date of the auditors

report. This AAS lays down the responsibility of the auditor in

respect of subsequent events. It also provides the audit

procedures for identification of relevant subsequent events,

for example, reading minutes, reviewing management

procedures, inquiries of management and other concerned

persons etc. the Standard also guides the auditor on his

reporting responsibilities in respect of subsequent events.

The AAS is effective for all audits commencing on or after

April 1, 2000.

11.20 AAS 20 : Knowledge of the Business

This Standard establishes standards on what is knowledge of

the business, why it is important to the auditor, and to the

audit staff working on an engagement. It also establishes

standards on why knowledge of the business is relevant to all

phases of an audit and how the auditor obtains and uses that

knowledge. The AAS therefore deals with the relevant topics

such as, obtaining knowledge of the business before andafter accepting the assignment, sources of knowledge, using

the knowledge, areas affected by the knowledge of the

clients business etc.

11.21 AAS 21 : Consideration of Laws and Regulations in an Audit

of Financial Statements

This AAS lays down standards on auditors responsibility

regarding consideration of laws and regulations in an audit of

financial statements. The AAS therefore deals with aspects

such as responsibility of the management for compliance with

laws and regulations, auditors consideration of


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compliance with laws and regulations, audit procedures

where non compliance is discovered, communicating/

reporting non compliance to management/users of audited

financial statements/ regulators, and situations for withdrawal

from engagement. The Appendix to the AAS contains

indications that non compliance might have occurred.

11.22 AAS 22 : Initial Engagements Opening Balances

Initial engagements mean when the financial statements

are audited for the first time or when the financial statements

for the preceding period were audited by another auditor.

Opening balances means those account balances which

exist at the beginning of the period. This AAS establishes

standards regarding audit of opening balances in case of

initial engagements. The Standard, therefore, deals with audit

procedures for obtaining sufficient appropriate evidence in

respect of opening balances. The Standard also providesguidance to the auditors on situations warranting qualified

opinion/ disclaimer of opinion.

11.23 AAS 23 : Related Parties

The Institute had issued Accounting Standard (AS) 18 on

Related Party Disclosures. The purpose of this AAS is to lay

standards on auditors responsibilities and audit procedures

regarding related parties and related party transaction, as

defined in AS 18. The AAS covers areas including, existence

and disclosure of related parties, transactions with related

parties, examining unidentified related party transactions,

management representations, audit conclusions and

reporting. The appendix to AAS contains an illustrative

management representation letter regarding related parties.

11.24 AAS 24 : Audit Considerations relating to Entities Using

Service Organisations

This AAS lays down standards for an auditor whose client

uses a service organisation. This AAS also describes the

reports of the auditors of the service organisation which may

be obtained by the auditor of the client. The AAS therefore


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first explains the concept of a service organisation and then

goes on to describe the considerations for the auditor of the

client, factors to be considered in determining the

significance of the activities of the service organisation to the

client and their relevance to audit, obtaining necessary

information from service organisations, auditors proceduresin case such information is insufficient etc.

11.25 AAS 25 : Comparatives

The purpose of this Auditing and Assurance Standard (AAS)

is to establish standards on the auditors responsibilities

regarding comparatives. It does not however deal with

situations when summarized financial statements or data are

presented with the audited financial statements. The AAS

therefore explains the concept of comparatives in financial

statements, corresponding figures and comparative financial

statements. It also deals with the requirement for obtaining

sufficient appropriate audit evidence in respect of

comparatives, audit procedures where prior period financial

statements are unaudited, audit procedures in case of

material misstatements in comparatives or where prior period

audit report contains a modified opinion, etc. The AAS also

contains a discussion on financial reporting frameworks for

comparatives and also illustrative auditors report in

circumstances described in the Standard.

11.26 AAS 26 : Terms of Audit Engagement

This AAS establishes standards on agreeing to the terms of

engagement with the client and the auditors response to a

request by client to change the terms of an engagement to

one that provides lower level of assurance. The AAS

discusses principal contents of an audit engagement letter,

audit engagement letter in case of audit of components,

factors affecting audit engagement letter in case of recurring

audits. The AAS also extensively deals with the duties and

responsibilities of the auditors in case of a change in

engagement.


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11.27 AAS 27 : Communications of Audit Matters with Those

Charged with Governance

The term governance as used in this AAS refers to the role

of persons entrusted with the supervision, control and

direction of an entity. Those charged with governance are

ordinarily accountable for ensuring that the entity achieves its

objectives, financial reporting, and reporting to interested

parties. The AAS establishes standards on communications

of audit matters arising from the audit of financial statements

between the auditor and those charged with governance of

an entity. The AAS therefore provides guidance to auditors

as to procedures to identify relevant persons, what are the

audit matters of general interest to be communicated, forms

of communication, factors affecting communication,

confidentiality requirements, laws and regulations etc.

11.28 AAS 28 : The Auditors Report on Financial Statements

The purpose of this AAS is to establish standards on the form

and content of the auditors report issued as a result of an

audit performed by an auditor of the financial statements of

an entity. Much of the standards laid down by this AAS can

be adapted to auditors reports on financial information other

than financial statements. The AAS deals extensively with

the concepts such as the basic elements of an auditors

report, what is an unqualified opinion, the concept of modified

audit report qualified opinion, adverse opinion, disclaimer

opinion, matters that affect the auditors opinion and mattersthat do not affect the auditors opinion, emphasis of matter

paragraphs, illustrative audit reports in each case.

11.29 AAS 29 : Auditing in a Computer Information Systems

Environment

A CIS environment exists when one or more computer(s) of

any type or size is (are) involved in the processing of

financial information, including quantitative data, of

significance to the audit, whether those computers are

operated by the entity or by a third party. The purpose of this


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Auditing and Assurance Standard (AAS) is to establish

standards on procedures to be followed when an audit is

conducted in a computer information systems (CIS)

environment. The AAS lays down standard in respect of

skills and competence needed by the auditor to conduct an

audit of CIS environment, factors to consider while planningsuch an audit, peculiar features of a CIS environment,

assessment of risk, audit procedures to reduce audit risk,

documentation in such audits.

11.30 AAS 30 : External Confirmations

This Auditing and Assurance Standard deals with an

important form of audit evidence, viz., external confirmations.

The Standard touches upon in details, with the various

important aspects related to external confirmations. For

example, relationship of external confirmation procedures to

the inherent and control risks, assertions addressed by

external confirmations, timing of external confirmations,

design of the external confirmation request, nature of

information being confirmed, form of confirmations positive

and negative, characteristics of respondents, evaluation of

the results of the confirmation process, management

requests etc.

11.31 AAS 31 : Engagements to Compile Financial Information

The salient feature of a compilation engagement is that in

such types of engagements, the accountant uses accountingexpertise as against auditing expertise to collect, classify and

summarise financial information. Ordinarily, a compilation

engagement involves reducing data to a manageable and

understandable form and does not require the accountant to

test the assertions underlying the concerned information.

Moreover, the procedures adopted by the accountant in

carrying out a compilation engagement do not enable him to

express any assurance or opinion on that financial

information.


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The AAS deals extensively with significant issues such as the

objective of a compilation engagement, basic principles in a

compilation engagement, including the ethical requirements,

responsibility of the management, the essential ingredients of

the terms of a compilation engagement, planning,

documentation and procedural aspects of a compilationengagement. The AAS also deals with the special

considerations in case of clients having an identified financial

reporting framework, clients having no financial reporting

framework and situations of non compliance with the

accounting standards by the client, estimates made by the

client. The AAS also provides detailed guidance as to the

reporting aspects in a compilation engagement. The AAS also

contains an illustrative engagement letter for compilation

engagements and also sample compilation reports covering

different situations for the benefit of the members.

11.32 AAS 32 : Engagements to Perform Agreed upon Procedures

regarding Financial Information

In an engagement to perform agreed upon procedures, the

auditor is usually required to give a report on the factual

findings, based on specified procedures performed on

specified subject matters of specified elements, accounts or

items of financial statements. The basic purpose of the AAS

is to establish standards on the auditors professional

responsibilities when an engagement to perform agreed upon

procedures regarding financial information is undertaken and

on the form and content of the report that the auditor issues

in connection with such an engagement. The AAS can,

however, also be used as a guide to perform agreed upon

procedures regarding non financial information. The AAS 32

thus, provides detailed guidance to the members as to the

objectives of an agreed upon procedures engagement, basic

principles involved in an agreed upon procedures

engagement, including ethical principles, the essential

aspects of the terms of the engagement. The AAS also deals

with the planning, documentation and procedures and

evidence aspects of such engagements. The AAS also


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contains standards in respect of report to be issued by the

auditor and its essential elements. The AAS also contains an

illustrative engagement letter and an illustrative format of the

report to be issued by the auditor.

11.33 AAS 33 : Engagements to Review Financial Statements

Unlike an audit, a review engagement is based mainly on

analytical procedures and inquiries conducted by the auditor.

The quarterly unaudited financial results of companies listed

on stock exchanges in India are subject to limited review by

the chartered accountants. The AAS on Engagements to

Review Financial Statements provides extensive guidance on

the types of such procedures and enquiries to be employed

by the auditors. The AAS establishes standards and provide

guidance on the auditors professional responsibilities and on

the form and content of the report that the auditor issues in

connection with a review. The AAS deals with issues such asscope of the review engagement, level of assurance, terms of

engagement, planning, documentation, review procedures,

conclusions and reporting requirements in the review

engagements. The AAS also illustrates format of

engagement letter to be issued, review procedures to be

applied and format of Review reports to be issued for

qualified as well as unqualified opinion.

11.34 AAS 34 : Audit Evidence Additional Consideration for

Specific Items

The objective of this AAS is to establish standards onauditors responsibilities, audit procedures and provide

guidance, in addition to that provided in AAS-5, Audit

Evidence, with respect to certain specific financial statement

amounts and other disclosures. This AAS assists the auditor

to obtain audit evidence with respect to following aspects:

Part A: Attendance at Physical Inventory Counting.

Part B: Inquiry Regarding Litigation and claims.

Part C: Valuation and Disclosure of Long Term Investments.

Part D: Segment Information.


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This AAS provides a detailed insight into each of these

aspects. It provides guidance with respect to definition,

procedures, management representations and audit

conclusions and reporting for each of these parts.

11.35 AAS 35 : The Examination of Prospective Financial

Information

The objective of this AAS is to provide guidance in respect of

engagements to examine and report on prospective financial

information. This AAS also covers specific aspects such as

examination procedures for best estimates and hypothetical

assumption.

This AAS also contains the illustrative formats of

Unmodified Report on a Projection

Unmodified Report on a Forecast

12. Method of accounting

12.1 If the institution is carrying on business it has to keep in mind

the provisions of section 145. Under section 145 only cash

method and mercantile method of accounting are permitted.

However, where the institution does not have income either

under the head profits and gains of business or profession

or income from other sources", the provisions of section 145

will not apply.

12.2 As the form requires the examination of the balance sheet

and the profit and loss account, it is necessary that these twostatements should be drawn up in accordance with the

generally accepted accounting principles including in

particular, the time honoured distinction between capital and

revenue. The balance sheet should, therefore, be a

summary of assets and liabilities, and the profit and loss

account should be a statement enumerating the various

items of income and expenditure.

12.3 It is sometimes the practice with some trusts to charge

certain capital expenditure also to the profit and loss account

in terms of the requirements of certain authorities for the


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sanction of grants. However, as the balance sheet has to be

prepared on the basis of the generally accepted accounting

principles, all assets must find a place in the balance sheet.

In other words, even though capital expenditure may be

charged off in the profit and loss account in order to satisfy

the requirements of certain authorities for sanction of grants,for the purpose of preparing the income and expenditure

account and the balance sheet on which the accountant has

to give his report, it is necessary that a clear distinction

between revenue and capital should be maintained and all

the assets should be properly reflected in the balance sheet.

12.4 The forms of the balance sheet and the profit and loss

account are not expressly prescribed. It is, therefore

suggested that the balance sheet and the profit and loss

account should be prepared in the generally accepted form.

As Form No.10B also requires the auditor to comment on thetruth and fairness of the financial statements, it is necessary

to ensure that the extent of disclosure in the financial

statements is fair and adequate. It is not possible to give

precise guidance in this respect, as each case will depend on

its own facts.

13. Form no.10B

Audit Report under section 12A(b) [now section

12A(1)(b)] of the Income-tax Act, 1961, in the case of

charitable or religious trusts or institutions

*I/We have examined the balance sheet of

. (name of the trust or

institution) as at .. and the profit and loss account for

the year ended on that date which are in agreement with the

books of account maintained by the said trust or institution.

*I/We have obtained all the information and

explanations which to the best of *my/our knowledge and

belief were necessary for the purposes of the audit. In

*my/our opinion, proper books of account have been kept by


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the head office and the branches of the above-named

*trust/institution visited by *me/us so far as appears from

*my/our examination of the books, and proper returns

adequate for the purposes of audit have been received from

branches not visited by *me/us, subject to the comments

given below:

In *my/our opinion and to the best of *my/our

information, and according to information given to *me/us, the

said accounts give a true and fair view -

(i) in the case of the balance sheet, of the state of affairs

of the above-named *trust/institution as at ,

and

(ii) in the case of the profit and loss account, of the profit

or loss of its accounting year ending on .

The prescribed particulars are annexed hereto.Place .. _____________

Date Signed

Accountant

Notes:

1. *Strike out whichever is not applicable.

2. This report has to be given by -

(i) a Chartered Accountant within the meaning of

the Chartered Accountants Act. 1949 (38 of1949); and

(ii) any person who, in relation to any State, is, by

virtue of the provisions of sub-section (2) of

section 226 of the Companies Act, 1956 (1 of

1956), entitled to be appointed to act as an

auditor of the company registered in that

State.

3. Where any of the matters stated in the report is

answered in the negative, or with a qualification, the

report shall state the reasons for the same.


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14. Prescribed particulars in the Annexure

Annexure

I. Application of income for charitable or religious

purposes

1. Amount of income of the previous year applied

to charitable or religious purposes in India

during that year

2. Whether the *trust/institution has exercised

the option under clause (2) of the Explanation

to section 11(1)? If so, the details of the

amount of income deemed to have been

applied to charitable or religious purposes in

India during the previous year

3. Amount of income accumulated or set apart/finally set apartfor application to charitable or

religious purposes, to the extent it does not

exceed 25 per cent of the income derived

from property held under trust wholly/in part

onlyfor such purposes. Note: Section 11 has

been amended to provide for 15% instead of

25%.

4. Amount of income eligible for exemption

under section 11(1)(c) (Give details)

5. Amount of income, in addition to the amount

referred to in item 3 above, accumulated or

set apart for specified purposes under section

11(2)

6. Whether the amount of income mentioned in

item 5 above has been invested or deposited

in the manner laid down in section 11(2) (b)?

If so, the details thereof

7. Whether any part of the income in respect of

which an option was exercised under clause


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(2) of the Explanation to section 11(1) in any

earlier year is deemed to be income of the

previous year under section 11 (1B)? If so,

the details thereof

8. Whether, during the previous year, any part of

income accumulated or set apart for

specified purposes under section 11(2) in any

earlier year-

(a) has been applied for purposes other

than charitable or religious purposes or

has ceased to be accumulated or set

apart for application thereto, or

(b) has ceased to remain invested in any

security referred to in section 11(2)(b)(i)

or deposited in any account referred to

in section 11(2)(b)(ii) or section

11(2)(b)(iii), or

(c) has not been utilised for purposes for

which it was accumulated or set apart

during the period for which it was to be

accumulated or set apart, or in the year

immediately following the expiry

thereof?

If so, details thereof

II. Application or use of income or property for thebenefit of persons referred to in section 13(3)

1. Whether any part of the income or property of

the trust/institution was lent, or continues to be

lent, in the previous year to any person

referred to in section 13(3) (hereinafter

referred to in this Annexure as such person)?

If so, give details of the amount, rate of interest

charged and the nature of security, if

any


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If so, give details

* Strike out whichever is not applicable.

III. Investments held at any time during the previous

year(s) in concerns in which persons referred to

in section 13(3) have a substantial interestS. No. Name

and

address

of the

concern

Where

the

concern

is a

company,

number

and class

of shares

held

Nominal

value

of the

invest-

ment

Income

from

the

invest-

ment

Whether

the amount

in col.4

exceeds 5

per cent of

the capital

of the

concern

during the

previous

year-say,

Yes/No

1 2 3 4 5 6

Total

Place

Date.

Signed

Accountant

15. Audit report under section 12A(1)(b)

15.1 The audit report consists of four paragraphs. The first

paragraph contains the declaration about the examination of

the balance sheet and the profit and loss account and also


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whether they are in agreement with the books of account

maintained by the institution. The second paragraph requires

the accountant to state whether he has obtained all the

information and explanations necessary for the purposes of

audit. It also requires a statement by the accountant

regarding the maintenance of proper books of account by thehead office and branches. The accountant has also to state

whether he has received from branches proper returns

adequate for the purpose of audit. The third paragraph

requires the accountant to state whether in his opinion the

accounts give a true and fair view, in the case of the balance

sheet, of the state of affairs of the institution on the relevant

date and in the case of the profit and loss account, of the

profit or loss of its accounting year ending on the relevant

date. The last paragraph requires the accountant to state that

the prescribed particulars are annexed to the audit report.

15.2 AAS 28 The Auditors Report on Financial Statements

states that the auditors report should be appropriately

addressed as required by the circumstances of the

engagement and applicable laws and regulations. Ordinarily,

the auditors report is addressed to the authority appointing

the auditor. In the present case the assessee has to furnish

the audit report along with the return of income. The

accountant has to address the audit report to the assessee.

16. Examination of balance sheet and the profit and

loss account

I /We have examined the balance sheet

of . (name

of the trust or institution) as at

.. and the profit and loss

account for the year ended on that

date which are in agreement with the

books of account maintained by the

said trust or institution.

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